Liz Truss: The Great Resignation and its Impact on UK Policy & Economy

Following the resignation of Boris Johnson, Liz Truss distinguished her leadership campaign by her commitment to deliver “growth, growth, growth”. In reflection, Truss’s brief stint in office was disastrous for the British economy. 

Truss’ ‘growth plan’ included cancelling a planned increase to corporation tax, reversing a rise in National Insurance Contributions, cutting the basic rate of income tax and abolishing the higher rate completely. Truss’ policies culminated in an unfunded £45 billion tax cut in her Chancellor of the Exchequer, Kwasi Kwarteng’s mini-budget.

Truss’ rationale seemed to invoke a renaissance of neo-liberal economic policies to fight inflation and stimulate economic growth. Previously supported by Ronald Reagan and Margaret Thatcher, neo-liberal economics purports minimal state intervention, deregulation and confidence in free markets. These austerity-driven financial policies favour the wealthy, and were unsurprisingly met with enormous public backlash in the UK against the current macroeconomic backdrop. In the midst of a cost of living crisis, stagnant growth and an energy crisis, Truss’ plans for the economy were seen as unorthodox by some and frankly naïve and reckless by many.  Upon the news of Kwarteng’s mini-budget, the pound dropped to the lowest level ever against the dollar, UK government bonds saw a heavy sell-off and the FTSE ended the day deep in the red. The Bank of England’s decision to intervene and purchase £65 billion of long-dated gilt was the calamitous culmination to a string of bad days for the British economy.

The backlash culminated in Truss sacking Kwarteng, only to step down herself 6 days later. Truss’ 44 day stint in office makes her the shortest-serving British prime minister in modern history. 

Her resignation has shaken the economy of Britain as it faces a worsened cost of living crisis as well as a looming recession. The election of the more economically moderate Rishi Sunak to No.10 has had somewhat of a calming effect on the economy with the pound stabilising. 

Sunak has outlined that difficult decisions lie ahead as he intends to cut spending. Jeremy Hunt, Chancellor of the Exchequer, warns that the new budget being prepared, is ‘going to be tough”.  

After weeks of financial turmoil, expectations for a recession have intensified and forecasts for its extent deepened.  While the appointment of Sunak has eased economic uncertainty and tensions in the bond market, the country still faces a profound economic challenge with a fourth-quarter GDP decline of 1.6%, predicted by Goldman Sachs’ economists. 

To curb inflation, it is expected that the Bank of England will increase monetary contractions by hiking interest rates 75 basis points in November and December. This will hopefully cool the economy enough to calm inflation and panic.

Truss’ brief stint as PM shows that neoliberal economic policies remain unpopular.  They are particularly unwelcome in economically challenging times and can even be term-ending for its proponents in power. With Sunak we can expect less turbulence but the outlook is still negative for the British economy as businesses and citizens alike brace themselves for tightening monetary policy.

Qatar: A Controversial World Cup Host

We are less than one month away from the beginning of the latest edition of the FIFA World Cup. The hosts to follow the well debated Russian successful bid in 2018 is the wealthy Gulf state of Qatar. Thirty-two nations and over 1.5 million fans are set to descend on Qatar over the month of World Cup action. It should be a time where we celebrate football’s unique ability to bring us all together. However, scepticism over Qatar’s suitability for its role of World Cup host abounds. 

Shoddy labour protection, deaths of migrant workers, the general disdain Qatar holds for the LGBTQIA+ community along with practical concerns such as those over accommodation and leisure have cumulated in unprecedented criticism for the Gulf state and FIFA.  

Scandals of bribery have rocked FIFA over its 2010 decision to make Russia and Qatar consecutive World Cup hosts, with former FIFA President Sepp Blatter banned from football until 2027.  Alas, Qatar remains the host. The nation state has fully committed to their unique opportunity to boost its “soft power and to add to its political influence” by spending over $200bn to act as host. Eight stadia have been refurbished or entirely constructed along with the creation of a new public transport system and international airport to meet the prerequisites for accommodating the tournament. Although Qatar’s oil reserves have made it a wealthy country, an outlay of $200 billion is immense for a country of only 3 million inhabitants.  

Initial projections by the Qatari government of potential revenues generated by the World Cup amounted to $20bn. However, projections have already been revised downwards to approximately $17bn. Financial outlays by former World Cup hosts have not seen the economic returns that were projected, with many financial experts noting the limited economic benefit of hosting a football tournament. The costs simply outweigh the potential financial benefits. However, there is an interesting pattern emerging in the previous hosts of the World Cup since 2010. Qatar, like Russia, South Africa and Brazil beforehand, have all experienced weakened soft power and concerns over political stability. This World Cup acts as a potential public relations boon, and that is what Qatar seeks.  

The image Qatar is trying to project, and the reality, appear very different indeed. According to the Guardian, 6500 migrant workers have died in the Gulf state since 2010. Amnesty International has joined mounting pressure to renumerate workers abused by the unlawful practices in the construction of stadia for the World Cup. Amnesty believes a figure of $440mn would be appropriate to compensate these individuals and their families. This, coupled with Qatar’s prohibition of many activities we have grown accustomed to, has exacerbated concern regarding Qatar’s suitability. These include the consumption of alcohol and tobacco, photography and reading non-Muslim religious texts.  

This all culminates in a situation where Qatar’s bet on this World Cup represents a significant risk.  

Backlash to the World Cup has been noteworthy with commercial sponsors ‘disliking’ the choice of Qatar as host. However, their dislike has not warranted much action as many continue to support the Qatari World Cup. One benefactor has emerged as an exception to this pattern. Danish football team sponsors Dankse Spil and Arbejdernes Landsbank have surrendered their sponsorship position on the Danish jerseys. They have replaced their brands with a series of human rights messages. The Danish Football Association and their sponsors believe they can draw attention to their reservations through powerful symbolism on the Danish football jerseys.  

This stance has been widely lauded by fans across the globe. However, Ricardo Fort, a well-established marketing executive, believes many companies will remain silent about issues in Qatar unless it impacts their companies directly.  

The projected soft power gains and increased tolerance of the Qatari regime will only succeed if we allow it to, by collectively ignoring the reality of those suffering at the hands of the Qatari state. 

We must raise our concerns against a homophobic, abusive regime hosting a tournament that is meant to celebrate our collective differences. As Lewis Hamilton said, “Cash is King”. The sponsors of this tournament will follow our collective morals regarding this contest. This may seem bleak as sponsors merely follow the trends of the time; however, I think this gives ordinary people the power to influence change. As we watch our favourite footballers throughout the month of footballing mania, keep those who have suffered and those who continue to suffer under the Qatari regime in your mind.  

Fiscal vs Monetary Policy: The UK’s Dilemma.

“In this jittery environment – there could be no reasons for more jitters”

Despite the IMF chief’s call for no “more jitters”, the sacking of the UK’s Chancellor on Friday (14/10), alongside a further fiscal policy U-turn, dashed their hopes of steady progress. But, how did we get here?

Kwasi Kwarteng’s mini-budget announcement in mid-September had a ‘pro-growth,’ ‘expansionary’ headline, but caused concern due to its financing and lack of approval by the Office for Budget Responsibility (OBR). The potentially unsustainable budget deficit, and the expansionary fiscal stance which conflicted with the Bank of England’s (BoE) deflationary policies led markets to price in higher interest rate rises, therefore reducing the price of gilts (government bonds).

However, panic spread due to pension funds’ heavy collateralisation through gilts, leading to calls for more collateral, and a mass sell-off of gilts by these funds. This sparked a downward spiral, causing further falls in gilt prices and igniting fears of a ‘run.’

Therefore, to prevent mass defaults on pension funds, and safeguard the finances of connected banks, the BoE stepped in and purchased these gilts, reducing the yield (i.e. the interest rate). But, like many G20 Central Banks, the BoE is tightening monetary policy to ward off inflation. Hence, this move served to undermine their credibility and muddy their inflation-targeting objectives. The announcement that the BoE would stop this bond-buying procedure on Friday should have re-established their policy tightening strategy and credibility, ultimately helping to re-stabilise market expectations. However, the sacking of Kwarteng, and the U-turn on the mini-budget, including a backtrack on the proposed decline in corporation tax, meant that a gilt sell-off re-started and prices fell, while currency markets remained turbulent. Truss’ fragile position as Prime Minister is likely to continue driving financial instability.

Alleviating This Uncertainty Via Communication

There are multiple issues stemming from this crisis in policy, but some uncertainty could be resolved through communication. Despite having no other option, Andrew Bailey (Governor of BoE) put himself in a difficult position on Wednesday by announcing the termination of gilt-buying on Friday. As long as the action was taken, the power of strong communication is illustrated here, as this helped stabilize expectations, and shore up BoE credibility as an inflation-targeter. On the other hand, Kwarteng’s failure to pre-warn business leaders about the mini-budget scared markets, unraveling the negative shocks. Furthermore, these shocks were amplified as he reportedly did not communicate certain elements with cabinet ministers, and failed to include the OBR.

Until Friday, there appeared to be coherence between No. 10 and No. 11, however Bailey’s “you’ll have to ask the Chancellor,” response to questions regarding Kwarteng’s absence from an IMF meeting, and early departure from the conference on Thursday, highlighted growing tensions between the BoE and UK politicians; giving further insight into the conflict between fiscal and monetary policy in the UK.

The Blame Game: Not So Independent.

While the past few weeks have seen monetary and fiscal policy work in opposite directions, Georgieva’s comments that fiscal policy should not undermine monetary policy illustrated the importance of the latter. That said, the Bank of England’s actions following unreasonable fiscal policy illustrates the opposite of this, unbalancing the see-saw of whether fiscal policy should support monetary policy (or vice-versa). Meanwhile, the independence and credibility of the BoE has been threatened, both by fiscal policy, and the risking of moral hazard through its recent buying of gilts. This illustrates a need for strong communication from monetary and fiscal policy makers in order to regain stability and transparency. Ultimately, if we are to learn from the 1970s, monetary policy needs to be allowed to lead, with politics stepping in to support those who will be hurt. This forces a dilemma for myopic politicians regarding the seemingly correct (in the long-run), but unpopular action to take.

Yesterday’s (Monday 17/10) events seemed to be taking this route, with financial markets stabilizing. On the other hand, some argue that the new Chancellor went too far, and that through tearing up Truss’ entire ‘manifesto,’ he is now the de-facto Prime Minister. Furthermore this has led to calls for a general election and stemmed questions of whether credibility can ever be restored to Truss’ leadership. Again, the lesson may be one of communication, but only time will tell whether trust can be regained once this breaks down – and until that point, political instability will continue to undermine the financial and monetary stability of the UK.

Turkey: Where From Here?

In September, the Turkish Central Bank decided to cut its key interest rate by 100 basis points to 12%. This policy may come as a surprise to some though, as Turkey’s headline measure of inflation rose for the fifteenth consecutive month to 80.2%. Many central banks have increased interest rates in recent times in order to combat the high inflation figures within their respective domestic economies. However, Turkey’s central bank have pursued a different strategy. They have been cutting interest rates, a highly unconventional policy move that has not worked in stemming inflationary pressures. This policy misalignment is due to the political influence of President Recep Tayyip Erdoğan, who is a strong believer that high interest rates are morally incorrect and are the cause of rampant inflation, not the cure. Since 2018, Turkey has been dealing with high inflation rates, a weak Lira and a weak economy due to the policies enacted by Erdoğan, who has taken more control of monetary policy mainly in the form of interest rates.

Under this macroeconomic strategy, the Turkish Lira has significantly depreciated against the dollar. At the beginning of 2018, the US dollar exchange rate traded at just under four liras per dollar, but it now trades at around eighteen and a half against the dollar. Currency depreciation can help make exports become relatively cheaper in international markets, but the severe depreciation has offset any of the export growth benefits due to significant economic instability in Turkey. GDP per capita has declined in Turkey since 2013, falling from $12,600 to $9,600 in 2021. This fall in prosperity is a direct result of the lack of foreign investment in the emerging economy. Turkey has traditionally had a low saving rate, making private-sector funding reliant on international investment.

In June, Erdoğan made policy attempts to reduce Turkey’s stubbornly high bond yields, which had made borrowing costs extremely expensive for the government. Lenders in the nation were required to hold a certain amount of Turkish government bonds as collateral for its currency deposits. This led to a sharp fall in bond yields helping to reduce borrowing costs for the government but seriously exposed domestic banks to inflationary risk. The increase in demand for bonds was essentially driven by domestic compliance, not an uptake in foreign investment. In August, the central bank enacted new rules to try and reduce the interest rates offered to customers by domestic lenders. The higher the interest rate charged by the lender, the more Turkish government bonds the lender would have to hold, incurring more risk on the lender. This policy led to a further reduction in yields, with the 10-year yield falling to around 11%. The 10-year yield was above 20% prior to the original policy change in June.

Although inflation stands at over 80% year-on-year, the rate of growth of inflation has begun to cool, which has led to the Turkish government signalling that inflation will begin to decline. The reduction in inflation growth has been challenged by opposition parties and other economists, however. The reduction in inflation growth contradicts the data released by the Istanbul Chamber of Commerce (ICOC), an independent economic research group in Turkey. Although ICOC use a different methodology to calculate the inflation rate than TURKStat, the official statistics organisation in Turkey, their rate has closely tracked the official CPI rate over the last few years.

Erdoğan’s political influence on government agencies is extremely powerful in Turkey. He has sacked three central bank governors since 2019, a tendency that eliminates the political independence of Turkey’s central bank. In June of this year, Bloomberg reported that the Head of Consumer Pricing at Turkstat, Mustafa Teke, had stepped down from his role with no explanation as to why. This followed from the replacement of TURKStat’s president in January, whose tenure did not last a year. Statistical tampering by a government is not a novel situation. Greece falsified their GDP deficits in 2010 to calm bond markets prior to the European Debt crisis. Andreas Georgiou, the president of their statistical agency at the time, leaked the correct GDP forecasts to Eurostat in a rogue move that subsequently upset Greek authorities. In 2017, he was sentenced to two years in prison for a ‘breach of duty’ and remains in exile in the US today.

The Turkish general election is due to take place in May next year, which makes cooling rampant inflation a key objective for the incumbent Erdoğan to hold power. Although official figures show inflation beginning to cool, many investors may doubt the legitimacy of the figures and any major recovery in the Turkish economy in 2023. The various policies of Erdoğan have not managed economic success thus far but may remain, as the authoritarian leader’s AKP party remain ahead in opinion polls. It is hard to see where the light at the end of the tunnel is for one of the world’s largest emerging economies.

Recession Talk: The OECD Forecasts for the European Economy 

On Monday 26th September, the Organisation for Economic Cooperation and Development (OECD) released their forecasts for the global economy. The outlook is bleak. International output growth is projected to grow at a rate of 2.2% over 2023, down from initial projections of 2.8% growth for 2023. This contrasts negatively to a growth rate of 3% in 2022 and represents an even greater fall from 6% growth in 2021. The Russian invasion of Ukraine, the ongoing effects of China’s Zero Covid Policy, as well as an increase in interest rates by the ECB, Federal Reserve, and Bank of England, have been identified as the main causes of this sluggish economic activity. The OECD identifies the Russian invasion of Ukraine as a key contributor to these negative forecasts – with forecasts outlining a $2.8 trillion decrease in global GDP thanks to the invasion. It also notes that the economic impact of the War is greater than previous forecasts predicted.

As a result, ECB policy has transitioned away from negative interest rates. This tightening of monetary policy has led to a decrease in the money supply, alleviating pressure on prices. This has also been cited as a primary contributor for slower economic growth over the next calendar year. 

The OECD predicts that because the US Fed started contractionary monetary policy earlier, their high inflation levels will decline more swiftly than those of Europe and the UK.

The OECD also notes the impact of reduced energy supplies from Russia to the EU. Gas storage levels have recently been recorded at 90% of capacity in the EU. However, projections indicate that this initiative will not be sufficient on its own to assist households through the Winter. A serious reconsideration of energy usage in Europe is pivotal and new European policy must acknowledge the necessity of reducing gas consumption. The OECD projects that European growth could fall by a further 1.25% points relative to their initial forecasts for 2023 if supply is not better diversified and gas consumption reduced. This, together with increasing inflation, would plunge several European economies into recession in 2023 if European leaders do not properly confront the energy crisis.

Although slow and laborious growth is predicted for the Eurozone, a recession is unavoidable if gas consumption cannot be reduced or if problems arise with other energy suppliers to the European countries. The outlook for the UK looks even more bleak with the OECD projecting zero growth. Germany’s dependence on Russian energy supplies has seen the OECD project a contraction in its economy for 2023. The outlook looks bleak indeed.

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